By Charlestien Harris, Retired Financial Coach at Southern Bancorp
June is celebrated as National Homeownership Month, and it is often said that owning a home is the ultimate American dream. However, there are essential components to consider when entering the homebuying process.
For first-time homebuyers, the process can feel overwhelming, but with the right preparation, it can also be an exciting journey toward building wealth, stability, and a place to call your own. Knowing how to start can make the difference between becoming a homeowner and continuing to rent.
Here are some factors to consider as you prepare for homeownership.
1. Assess your financial readiness.
Before entering the housing market, take a close look at your finances. Homeownership is a long-term commitment, so understanding your financial health is key. Check your credit score, as a higher score can help you secure better mortgage rates. Review your credit report for errors, and work to improve your score by paying down debt and making timely payments.
2. Understand the steps to obtain a mortgage.
Educate yourself about different types of mortgage products, including fixed-rate mortgages, adjustable-rate loans, balloon loans, conventional loans, and government-backed loans such as FHA or VA loans. Understanding your options can help you save money and reduce stress. Familiarize yourself with terms, interest rates, and closing costs so you can make informed decisions before starting the process.
3. Begin budgeting before the purchase.
Start by calculating what you can afford, factoring in your income, expenses, and potential mortgage payments. A general rule is to ensure your housing costs (mortgage, insurance, and taxes) do not exceed 28–30% of your monthly income.
4. Begin saving for your down payment and closing costs.
Some loans allow down payments as low as 3–5%, but you should aim to save at least 10–20% to reduce your loan amount and avoid private mortgage insurance (PMI). Closing costs are another important factor that many people overlook. While some costs may be rolled into the loan, others must be paid separately and covered before closing.
5. Get pre-approved for a mortgage.
Understand the difference between being pre-approved and pre-qualified. A mortgage pre-approval gives you a clear picture of how much you can borrow and shows sellers you are a serious buyer. Contact multiple lenders to compare interest rates, terms, and fees. Pre-approval also helps you narrow your home search to properties within your budget, saving time and reducing disappointment.
Prequalification, on the other hand, is a quick, informal estimate of how much you can borrow based on self-reported financial information, which is typically not verified.
6. Know your needs and wants, and make a list.
Sit down and create a list of must-haves versus nice-to-haves for your future home. Consider factors such as:
Being clear about your priorities helps you stay focused and avoid committing to a home that does not meet your core needs.
Becoming a homeowner does not have to be stressful. Learning key terms and understanding the process ahead of time will help you feel more confident and prepared as you move forward. You don’t have to wait until June to begin learning about homeownership – start educating yourself as soon as you feel ready to begin the journey.
For more information on this and other financial topics, you can email me at [email protected] or write to me at PO Box 1825, Clarksdale, MS 38614.
Until next week – stay financially fit!
